Denver airport cuts maintenance as costs of showcase project rise

By David Olinger and Karen E. CrummyThe Denver Post

Posted:
03/01/2014 10:00:00 PM MST

Updated:
04/22/2014 12:50:57 PM MDT

City officials say low interest rates and better-than-expected revenues make the timing ideal to build a hotel, train station and plaza at the south end of the Denver International Airport terminal. (RJ Sangosti, The Denver Post)

Timeline

The $544 million price tag for Denver International Airport's showcase hotel and train terminal construction project does not include at least $128 million in what airport management calls "additional related" costs, putting its real cost 34 percent over the $500 million budget proposed three years ago.

As the cost of the project rose, airport officials have insisted it remains on or close to budget. But in order to do that, they have excluded related costs and apparently cut spending in other critical areas. During the past two years, DIA management slashed more than $200 million from the airport's runway-repair budget and other long-term maintenance projects, a Denver Post investigation found.

The airport's increasing debt could affect not only future maintenance and safety-related projects, but also the 52 million passengers who use DIA yearly through higher prices on everything from airport concessions to parking to airline passenger fees.

Additionally, it could hurt holders of DIA bonds and limit the airport's cash on hand — a significant risk to its ability to react to the loss of a major airline, according to an airport document.

Airline analysts recently warned that Frontier Airlines may have to decentralize its Denver operations so it is less dependent on one market.

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Airport officials deny they have tried to hide the true cost of bringing a train station, luxury hotel and public plaza to the terminal. They say they properly reported the estimated cost of the core project and that cuts in other areas are unrelated to their biggest project.

Manager Kim Day
and other airport officials said reducing capital-maintenance costs and postponing a seventh runway were prudent financial decisions that will benefit the airlines, which are charged for airfield-maintenance costs.

(Click to enlarge graphic.) Some aspects of DIA s terminal-expansion project have changed
over the past few years to reduce costs, even as the overall price rose. The airport has delayed or scaled back other plans. (The Denver Post)

Nothing, including safety-related maintenance, has been sacrificed to complete a project that Day expects to enhance the airport's reputation as a world-class facility, she said.

"I don't think we can identify any particular impact this project has had on us overall," she said. "It's something we've budgeted for. It's something we think will produce revenue. We do adjustments periodically based on what's going on in the industry."

But an e-mail from DIA's finance chief, Patrick Heck, shows that significant reductions were being made in other capital expenses at a time that huge dollars were being devoted to the South Terminal Redevelopment Program, or STRP, as the project is known.

"Right now, we have cut almost $100M of non-STRP spending from the CIP (capital-improvement program)," Heck wrote to Day in 2010, "and we have an additional $90M identified as want to do."

He went on to say there needed to be a discussion as to "other projects we believe need to be re-categorized."

A Denver Post investigation into DIA's terminal project found:

• DIA has slashed its major runway-repair budget for the next five years by 80 percent. It also has delayed construction of a seventh runway — estimated to cost up to $400 million — until sometime in the next decade.

• At $544 million, the terminal and hotel project is already 9 percent over its $500 million budget. When "related" costs are added, the project is 34 percent over budget. Two years ago, Denver Auditor Dennis Gallagher, quoting airport officials, said anything over 10 percent could cause a " significant budget risk."

• The project budget now delays key features for train passengers — checking their bags at the airport station and going through a separate security-screening area.

• After borrowing $280 million to build new gates in 2008, DIA put the expansion on hold indefinitely and spent the money on other capital projects. Now it is building temporary gates to save money and meet gate demand.

Airport Manager Kim Day said reducing capital maintenance costs and postponing a seventh runway were prudent financial decisions that will benefit the airlines. (Hyoung Chang, The Denver Post)

• All ratings agencies have expressed concern over the size of the airport's capital plan, of which the terminal project is the largest piece. Moody's Investors Service assigned the airport a negative outlook for the past three years.

The airport has increased its capital debt by $800 million since 2012, much of it going toward terminal project costs.

DIA officials say new roadway bridges to the terminal, an expansion of the terminal-to-concourse passenger train system and a $53 million dispute with the Regional Transportation District over train-station costs should not be counted as part of the terminal project.

But their own bond documents tell a different story.

"Additional related"

In 2012, the airport told investors that baggage checks at the train station, expanding the terminal-to-concourse train, realigning airport roadways and relocating utilities were all part of a $500 million project budget.

In 2013, the airport told investors that the terminal-to-concourse train expansion, an extension of the RTD train platform, and utility and roadway relocations were "additional related" projects. Also listed as additional was work for future build-out of the baggage checks and separate security screening for train passengers.

The total estimated cost: $672 million.

Don Wood, who retired last year as the airport's capital-improvement program manager, said the airport shifted costs from the project budget into "other" capital improvements to avoid the appearance of overruns.

As construction costs grew, "they started pulling out elements of the development and categorizing them as something else," he said.

Airport officials deny that. They say the project's evolving design accounts for some of these changes, and the core terminal-development budget remains $544 million.

"We brought fiscal discipline to this airport," said Day, who started in 2008. "We are always conscious of how we are spending our money and making sure we're prudent."

Day further argued that the completed project will bring money to the airport. DIA projects revenues after debt payments of at least $6 million a year from the hotel, plus $1 million to $2 million to the city from hotel sales taxes.

Believed to be forthright

DIA is a self-supporting department of city government, raising revenues from airline charges and passenger spending on parking and concessions. Its operations are overseen by the Denver City Council, which approves its budgets. The council would need to approve increases to the $544 million terminal project cost.

Two council members said they believe airport officials have been forthright in their reporting of project costs.

Christopher Herndon, whose district includes DIA, said he "deferred to the airport team" when asked about capital-maintenance cuts.

Council president Mary Beth Susman said she trusts airport management is properly budgeting — even in the case of runway maintenance.

"How can we project what will happen?" she said. "How do we know it won't work out fine?"

The city administration says the airport can pay for the project and related costs without affecting other capital projects.

Interest rates on project debt are lower than anticipated, resulting in $70 million in savings, they said, and nonairline revenues were $55 million higher than expected in 2013.

Rowena Alegria, a spokeswoman for Denver Mayor Michael Hancock,called the timing for the terminal and related projects ideal.

"To move on nonessential capital projects now while interest rates are historically low and revenues are higher than projected just makes good financial sense," she said. "Combined, these projects will enhance the airport and make DIA — already the region's No. 1 job-provider and economic driver — an even stronger asset for all of metro Denver for decades to come."

But in interviews, former airport officials expressed concern about the climbing costs of the edifice rising in front of the terminal and its effect on the availability of money for future airport needs.

Turner West retired as DIA's aviation manager six years ago but keeps in touch with people who still work there.

From them, he said, "there has been a consistent commentary that all of the money possible has been drained from maintenance programs to pay for the south terminal project."

Risks seen

John Strong, an expert on airline-industry economics, said the risk to the public is not that DIA can't pay back the bonds sold to finance the project. Instead, he sees risks stemming from more cost overruns or rail-line construction delays.

Part of RTD's FasTracks program is linking a 22.8-mile East Rail line between Denver Union Station and the airport. Although construction is on schedule, "there is a completion risk here. If the (rail line) runs out of money or doesn't get finished on time, the value of the south terminal project falls," Strong said, adding: "The thing that gets people nervous is that the south terminal project by itself won't do anything to increase airport cash flows or profit potential in a significant way."

Airlines operating at DIA previously expressed concern that an expensive terminal project may increase carrier costs, which could be passed on to travelers. A spokeswoman for United Airlines, the airport's largest carrier, said United is working with DIA "to remain a cost-competitive airport."

The airport charged $12.13 per enplaned passenger last year, near the middle for large hub airports. A study prepared for DIA forecasts that will grow to $15 by 2018, putting it fifth-highest among a group of 14 airports surveyed.

The grand vision of a luxury hotel, train station and open-air plaza at Denver's airport began to take shape after Day, an architect, visited the airport in Munich soon after she was appointed, and she admired its plaza.

"Everyone said, 'This is exactly what we want to do in Denver,' " she said.

She turned to Santiago Calatrava, a well-known Spanish architect who in 2009 unveiled a $650 million design for the terminal redevelopment project.

It promised RTD trains to and from the airport, baggage check-in at the train station, a separate security-screening area for train passengers and a plaza with an ornate steel-and-glass roof connecting the hotel to the terminal.

The new 519-room hotel, managed by Westin but owned by the airport, would feature a lobby with spectacular views of the Rocky Mountains to the west and the Great Plains to the east. Visitors to its pool and fitness center would gaze upon a mountain panorama from Pikes Peak to Mount Evans during the day and the lights of Denver and the airport at night.

The hotel would feature a grand ballroom, two junior ballrooms and a dozen meeting rooms. The open-air plaza, partially covered by the new roof, would draw people to a public space featuring speakers, concerts and car shows.

Concerns about cost

From the outset, Day's vision encountered questions of affordability.

Stan Koniz, the airport's former finance chief, warned Day in 2009 that the project's high price tag could raise airport fees and rates and jeopardize its bond rating.

"I told her, 'Kim, we can't afford this,' " said Koniz, who was put on leave for insubordination. Day denied that was the cause but did not give another reason. Koniz said he stands by that statement and still believes that's why she stripped him of his job.

In 2011, the airport's own financial study, which included estimates of future passenger traffic, revenues, costs to the airport partners and long-term debt obligations, contributed to officials' scaling the project back to $500 million.

The area of the new complex was reduced. One story of the hotel and office space were eliminated, along with a Calatrava-designed bridge on the airport road. Calatrava eventually bowed out, taking $13.8 million in fees for design work.

During the next two years, some project details were cut, while others were added. DIA used a contracting process — intended to tamp down costs and delays — where design and construction occurs simultaneously. Airports in other cities have used the same type of contract.

Airport officials refer to some project changes as "design evolution" and defend the exclusion of $128 million as related costs.

For example, in the case of the $53 million dispute with RTD, the airport once carried that as a $13 million project cost, expecting an even split of $26 million with RTD.

DIA sued RTD last year after a mediator ruled the airport was entitled to just $7.8 million.

As the station progressed from conception to design and construction and as the cost estimate grew, "we made the decision to carry this as a separate line item due to the pending dispute resolution with RTD," airport spokeswoman Stacey Stegman said.

The airport also is counting as a related expense $30 million for new roadway bridges at terminal levels 4 and 6, saying it simply made sense to replace them while construction was underway.

"It's important to know that some of the items we added, like the levels 4 and 6 bridges, were never part of the original project. We added them later because it made sense," Stegman said.

Former airport budget officials dispute that.

"These projects never would have existed if it weren't for STRP," said Don Wood, the retired capital-program manager.

Michael Trivette, a resource planning manager who retired last year, said the bridges were relocated because they were in the way of the terminal project. "Without the hotel and train station, there would be no need to change the bridges," he said.

DIA documents provided to The Post also conflict with airport management's claim. In a 2012 e-mail to employees, airport management announced it was "reconstructing the south Level 4, 5 and 6 bridges as part of of the South Terminal Redevelopment Program," requiring a relocation of employee shuttles.

In a separate fact sheet headed "Signs of Progress at DIA," the airport reported in 2012 that it would "demolish and reconfigure the bridges that connect Peña Boulevard to the south end of Jeppesen Terminal as part of the South Terminal Redevelopment Program."

Former DIA officials contend that capital spending for runway and other maintenance projects, planning for a seventh runway and money for new gates all were reduced as the terminal budget grew.

Airport managers disagree. They said no maintenance need has been neglected, the seventh runway will not be needed for years and their scaled-down budget for gates shows fiscal responsibility.

Runway maintenance is considered critical to airport safety because any loose objects on a runway pose a hazard. Ranging from mechanics' tools to broken pavement, debris can damage aircraft by getting sucked into an engine, for example, and in rare instances can cause an accident.

For this reason, the Denver airport methodically surveys the giant slabs of concrete along its six runways, taxiways and aprons for cracks.

In the past, the airport has shut down an entire runway, checking every slab and replacing any that is cracked enough to risk a piece of broken pavement. The airport budgeted $40 million last year for a major rehabilitation of one runway and $37 million the year before.

Other projects

In 2012, an airport capital plan showed a budget of $160 million from 2014 through 2018 to continue its aggressive approach to runway safety. But as costs of the terminal project grew that year, former airport managers said they were asked to find ways to defer or reduce other capital projects.

The capital budget for major runway maintenance is now $6.5 million a year, or $32.5 million in five years — an 80 percent reduction from that 2012 budget. A note attached to the reduced budget reads, "New work plan, unknown if will be effective."

Similarly, the five-year capital budget for repairing other slabs on the aprons and taxiways was cut from $39 million to $12.5 million; for concourses B and C pavement rehabilitation from $54 million to $6.5 million; and for airfield-drainage improvements from $11 million to $1.5 million.

Trivette said that from a financial standpoint, "the concern is one huge project will take up all the debt capacity, and the south terminal redevelopment project did. The only way they can afford to do it is to delay or not do other projects."

Airport officials say pavement-management engineers agreed to a more targeted maintenance program, and spending can be increased if the airfield shows signs of deterioration.

"We would never do anything to compromise the safety of the airport. The airfield is our top priority," Stegman said. But under Turner West, she said, "the airport was investing significant dollars in maintenance with no real understanding of the impact, future needs and no ability to measure if that investment was the right one. There was a lot of spending without a lot of accountability."

Disgruntled current and former employees are mischaracterizing the airport's capital plans, she said.

Major maintenance projects, terminal improvements and the hotel and train station are part of the same capital budget, but costs are recouped differently. Stegman said airfield costs are paid by Federal Aviation Administration grants and airlines; terminal-complex costs by tenants; and hotel and train station costs by nonairline revenues such as parking and concessions.

A DIA master plan in 2011 forecast that a seventh runway would be needed as soon as 2015 to avoid flight delays. The airport capital plan listed it as a "must do" project. A year later, the runway was delayed, but the airport still budgeted $36.7 million for 2018 to begin construction.

Denver winds play a role in the airport's runway needs. When strong winds blow from the west, which is a common occurrence, only two of DIA's six runways may be used for takeoffs and landings. The seventh runway would give the airport a third east-west option.

Yet today, its capital plan through 2018 eliminates all runway-construction funds. Finance chief Heck said it was postponed because people are flying in and out of Denver on fewer, larger planes, causing departures and landings to decrease the past two years.

According to FAA officials, DIA's latest air-traffic analysis showed its seventh runway should operate by 2020 or 2021.

That may not happen. The airport's capital budget now shows only $200,000 to begin planning the runway in 2018. Heck described the permitting, design and construction of that runway as a five-year project, putting its operation almost a decade away.

New concourse gates have been part of DIA's revenue-raising plans since 2008, when Day told the City Council that the airport would need 20 more. But records show that the $280 million borrowed to extend Concourse C with 10 new gates was postponed indefinitely and the money used for other projects. About $14.5 million was spent to start the terminal redevelopment.

Heck said those bonds enabled DIA to go four years without increasing its debt. The concourse extension was postponed partly by Frontier Airlines' bankruptcy filing in 2008, he said, which made the need for more gates uncertain.

Now the airport is building five "temporary" gates that airport officials say will look like other boarding areas to passengers and could last for decades. That low-cost option was chosen because "we work every day to keep the airline costs down for our airline partners," Day said.

Criticism from auditor

From 2012 to 2013, the Denver auditor, in three separate audits, criticized DIA's management.

At $544 million, the terminal project was nearly 9 percent over budget, according to the auditor. However, the audit noted, airport officials said it would not be a "significant" budget risk until overruns hit 10 percent.

Additionally, the audits hammered the airport for everything from lacking internal controls on construction-project costs to failing to plan for unexpected maintenance and setting aside contingency funds for critical assets.

Don Wood said those problems still exist.

"What they're doing is more emergency repairs," he said. "Delayed capital maintenance will catch up. When you delay a cost for needed repairs, things just keep getting worse and worse and worse."

As cost estimates for the terminal program climbed, DIA management's reaction was "Oh, my God, we've got to shove enough of the other projects off to pay for these overruns," Wood said.

Meanwhile, Moody's weighed in. Despite giving the airport an A1 rating in 2011 and 2012, Moody's assigned it a negative outlook. The credit-rating agency noted that projects such as the hotel, a "non-core and non-revenue" generating endeavor, added "substantial new operational risks" to the airport, which was already carrying an "above-average debt burden."

Additionally, the high capital-improvement program costs would require additional debt if "certain projects are not deferred," Moody's said.

In 2013, the airport borrowed more money with subordinate bonds, a higher-risk loan akin to a second mortgage. Moody's rated those bonds A2, a notch lower than its senior debt, and again cautioned investors that the financial outlook for DIA was negative.

"The key portion of the capital plan that helped form that negative outlook was the STRP project," Earl Heffintrayer, the lead analyst of its airport sector, said in an interview.

Moody's calculated that the airport debt per passenger landing at and leaving Denver would grow 28 percent in four years.

That's pertinent for two reasons, Heffintrayer said. "It increases the cost of airlines to use the airport," and "it also is a proxy for just how much debt you have to pay off. You'll likely be an elevated-cost airport for a significant amount of time."

As of 2012, Denver ranked 15th out of 91 airports on that debt-per-passenger scale. David Jacobson, a Moody's spokesman, said that ranking is likely to rise because about half the airports with steeper debt ratios have completed capital projects and are reducing their debts.

The risk of exceeding the original budget was spelled out in the airport's own documents in February 2013.

All ratings agencies "have expressed concern over the size of the capital plan, and this could cause one or more of the agencies to downgrade the airport" and negatively impact bond holders, resulting in possible legal action, according to an airport document prepared for the mayor.

Future cost increases are possible, the document said, and DIA might need to use cash to offset borrowing costs. This would affect its ability to invest in things such as airline cost reductions and respond to events such as the loss of a major airline carrier.

DIA officials assured City Council members last March that they had project costs under control, even as those costs jumped from $500 million to $544 million. The additional costs, terminal project manager Stu Williams said, resulted from work for which they did not have final price quotes and from unforeseen factors, such as improving market conditions that made construction work more costly.

The $128 million in terminal "additional related" costs include extension of the terminal-to-concourse train, the bridges to the terminal, utility relocations and an expansion of the train platform.

Other features that once were part of the project are missing even at the higher price.

Check your bags at the station? The 2013 bond issue spoke of a "right of way for future baggage systems."

Separate security screening for train passengers? That has become "construction of space and infrastructure for the future build-out of additional passenger security-screening facilities."

The airport has allocated $1.2 million for the shell of a security screening area for train passengers. It estimates the baggage system and security-screening area will cost about $16 million to finish.

Strong, the aviation economist, said observers in the industry wonder whether the project isn't a "bit of a stretch."

He said, "I heard one say, 'It's either a visionary project or a lesson for the rest of us.' "

Construction crews work on a hotel and transit center at Denver International Airport, February, 12 2014. The Hotel and Transit Center is slated for completion in phases with the hotel opening in 2015 and rail service starting in 2016. (RJ Sangosti, The Denver Post)

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